During the last week, I met policymakers from Sweden and Norway, and visited investor clients in the US. Today, I discuss the views of policymakers and clients and compare them with our views.
In the meetings, I focused on our strongest call currently: (a) how the ECB failed, (b) the prospect of a Riksbank rate cut and Norges Bank rate hike, and (c) our market views based on those calls. On the ECB, some clients believed that its open-ended QE and subsidy to banks marked a significant shift in t he central bank’s stance.
They did not agree with my view that the ECB’s op en-ended QE is not credible, which I argued here. It is true that the ECB might pursue QE for a long time, but this would be due to persistently low inflation. In my view, the mere threat that a divided ECB could terminate a small-scale QE programme early is weighing on market sentiment. Christine Lagarde and Ursula Von der Leyen might push for fiscal stimulus in the Eurozone, but they need to convince the Germans.
Unfortunately, it appears the German government remains unwilling to launch large scale fiscal stimulus before the economy faces a recession, despite the awful data this week. Until the Eurozone reaches a more credible fiscal/monetary policy mix, I expect inflation expectations and EUR/USD to fall further (See our comment here).
On Sweden, I argued the labour market is weakening significantly, which could force the Riksbank to shift to a dovish stance. Unemployment rates have risen sharply, job vacancies are falling and overtime hours have plunged. Job losses are led by public-sector jobs within health care and cultural services, which might be related to restrictions on municipal finances where local governments are under pressure, as argued by our Chief Economist in Sweden Michael Grahn.
I received pushback from policymakers and in particular clients on our bearish view on the Swedish labour market. They argue the survey data, which is the basis for the official unemployment rates, might be distorted. I agree that the survey data likely overestimates the weakness in the labour market, and I believe we are in for a correction next month. However, there is little doubt that the labour market is weakening, which the unemployment rate based on registered people also demonstrates.
Clients challenged me on whether the Swedish economy has faced shocks, which explains current labour market weakness. In my view, Sweden is currently facing the hangover from the boom during 2014-2016, where housing prices rose sharply while real wage growth collapsed. This supported rampant growth in non-residential investments and private consumption.
Since late 2017, Sweden has faced the aftermath of this boom as housing prices dropped and inflation edged higher, eroding consumers’ purchasing power. Those factors weakened domestic demand, weighing on the labour market. However, housing prices are now rising slightly in Sweden and real wage growth has bottomed out. Going forward, this could support domestic demand.
I faced even more pushback from clients with respect to our call that the Riksbank will cut rates in February. Clients believe the Riksbank will be reluctant to shift stance and is keen to get interest rates to zero. Clients compare the current situation to last autumn, where the Riksbank said they would hike rates in December or February, and hiked in December despite weak data. Clients also notice the minutes from the September meeting and recent comments from board members where they express confidence in the inflation outlook.
I agree with the Riksbank and clients that inflation and inflation expectations are better anchored in Sweden than in the Eurozone, but recent labour market weakness is worrisome. I imagine the Riskbank would welcome a more expansionary fiscal policy. However, that does not seem to be forthcoming, hence the Riksbank might be forced to shift stance. The fact that board members do not sound more dovish currently may be due to the Riskbank’s communication policy, where board members cannot publically state they are changing views following the release of the minutes, as highlighted by our Swedish research head, Michael Boström.
Thus, we believe the Riksbank in late October will postpone its expectations of near-term rate hikes. Our dovish expectations for the Riskbank support our case for lower short-end SEK rates and a weaker SEK, as expressed by our Swedish research team here.
In Norway, the discussion with clients and policymakers centred on why the Norwegian krona is so weak. In our view, this is due to the global slowdown, USD outperformance and the Fed’s reluctance to p re-commit to a long easing cycle. In my view, the fact that Norges Bank at the policy meeting on 19 September lowered the long-end of the rate path by a significant 14bp also mitigated the brief NOK appreciation following the rate hike.
We expect the global headwinds to prevail, which together with seasonal factors are the key reasons why we now expect the NOK to remain weak into year-end, as explained by our Scandi strategist Kristoffer Kjær Lomholt on p. 6 here. In my view, if the NOK stays weak and the global economy does not slow sharply, there is a good case that Norges Bank will hike again in H1-20, which our Chief Economist in Norway Frank Jullum also argues.